PA state income deduction for Agency Bond (like Federal Home Loan Bank)

[GreenApple123]

All federal agency bond interests (Federal Farm Credit Bank, Federal Home Loan Bank) are not subject to state income tax.

Now the issue is: where/what is the appropriate ways to enter the data:

For Pennsylvania,  I can go directly to "Interest Income Worksheet", there is a column called "Adjustment Amount", I can simply enter the total of Agency Bond payment, then, for the "Adjust Type", I use "M" - which says "State Use Only". This way, it successfully deduct the Agency Bond amount. However, I am not sure if "M" is the right choice since it says "State Use Only" -- does it mean it is reserved for PA State official use?

The other choice includes "H" - which means Other Adjustment. However, choosing "H" does not give me the full deduction of the agency bond payment (only gives me, like, 90%).

Please advise. Many thanks.

[AmyC · Accepted solution]

The M is for PA state only which is what you want. You can enter it in the program by selecting to Edit your Interest Income Summary. Select yes you want to adjust federal interest income and continue through. It is easier in Forms mode and the program allows it.

In other areas, be careful that you are not overriding fields as that will void the accuracy guarantee.

[jinparkg]

how about for VA, I don't see where I can edit interest income?

Where do I put income for agency bond in VA state tax return in turbotax?

[asdfl76]

This doesn’t seem to work for Massachusetts. Selecting Massachusetts labels the interest as MA bank interest, which is incorrect and limits the amount that isn’t taxable to $200.

[AmyC]

The agency bond may not be deductible to MA. You will need to determine the portion that is federal agency vs GSE to determine if any is deductible. 

MA exempts interest  according to TIR 89-8: Income Tax Treatment of Interest and Gains that is:

1. backed by the full faith and credit of the United States; and
2. it embodies a direct and binding promise by the Unites States to pay specified sums on specified dates.

An agency bond:

Debt issued by a government-sponsored enterprise (GSE) or a federal agency. 

The key difference between a GSE and a federal agency is that a GSE’s obligations are not guaranteed by the government, whereas a federal agency’s debt is backed up by a government guarantee.

MA is state defined income and does not begin with the federal AGI like many states so you are able to exclude any allowed portion.  It requires entries in the federal and state.

Federal

You would exclude it in the federal section immediately after entry of the 1099-INT. Select your state from the dropdown box.

State:

Interest and dividends section allows you to add or exclude amounts. You will need to exclude the amounts necessary regardless of the wording on the screen. The worksheets are not important but the tax return forms are. You want the forms correct.

@asdfl76 

For VA: Agency bonds are exempt. VA begins with the federal AGI. In the VA return, select subtractions and obligations of the US. See VA subtractions

@jinparkg 

[GreenApple123]

I noticed that there is a *serious bug* in turbotax: whenever I entered the "Int Inc Stmt" for the agency bond adjustment with mark "M", everything is fine. I can bring turbotax and down and up, all stays good.

*However* whenever this is required turbutax updates (typically 256M download), after relaunch, all the entered data described above is *gone*.

This will cause many filing errors... and people losing their eligible deductions.